Bank Alfalah Limited was incorporated on 21 June 1997 as a public limited company under the Companies Ordinance 1984.
The bank is engaged in commercial banking and related services as defined in the Banking Companies Ordinance, 1962. The bank privatised in 1997. The Abu Dhabi Group, owner of the bank, has invested in technology to have an extensive range of products and services. They broadly include general banking, financial services, Islamic banking, consumer banking, treasury and international banking. Because of its superlative performance over the years the bank has been assigned short-term rating of A1+ and long term rating of AA.
The bank has a network of 199 branches including 23 Islamic banking branches and 7 foreign branches in Bangladesh, Afghanistan and one wholesale banking unit in Bahrain. Bank Alfalah has expanded its branch network and deposit base, along with making profitable advances and increasing the range of products and services. It is the 5th largest bank of Pakistan in terms of its assets that are 6% of the total banking sector.
The banking sector has expanded rapidly in Pakistan along with the fast paced economic growth. In the year 2006 banks had a market capitalisation 1/3rd of the overall market cap of KSE indicating the large share the banking sector has in the market. The increased competition in the banking sector has encouraged the banks to come up with the services that could satisfy the needs of a large consumer base. The result has been increased profitability of all banks.
FINANCIAL PERFORMANCE (FY'04-3Q'07):
The bank's performance has generally improved in all segments in 3Q'07. Profits increased from Rs 1.3 million in 3Q06 (EPS: 2.27) to Rs 3 million in 3Q07 (EPS: Rs 4.63), registering an increase of 125%. This attributed to overall increase in business volume including the capital gain on the sale of shares of Warid Telecom Pvt. Ltd.
In terms of profits the Pakistan banking sector ranks amongst the top ten in the world. Bank Alfalah has had its share in the phenomenal profits growth of the banking sector. Profits have risen largely due to increases in advances, investments, and lending to financial institutions (Earning Assets). There has been a shift from advances to higher investments in 3Q'07. This shift is in line with the overall industry trend.
A positive growth of deposits has not succeeded in improving the ROD of the bank, which has declined in 2006. The deposits have shown an increase over the years largely due to increase in fixed deposits by the customers. Deposits by both customers and financial institutions have seen a growth. The most prominent factor behind this was increase in the market's liquidity due to increased FDI and remittances inflow. Since 2004 there has been a growth of 131% in the bank's deposits which is an indicative of the growth that this bank has seen.
Profits have also risen due to increase in advances, investments, and lending to financial institutions (Earning Assets). Only the lending to financial institutions grew by 264% in FY06. But ROD has shown a declining trend. This has been the case because the profits of Alfalah have not risen proportionally with the increase in deposits. In the year 2006 deposits grew by 7.7%. This significant increase was the result of the excessive reserve growth in the economy. But the corresponding increase in profits was a meager 3.6%. In FY04 the ROD was 1.06 that has declined to 0.76 in 2006.
Deposits increased from Rs 239m to Rs 260m an increase of 9% in 3Q'07. The trend of ROD has reversed this year as it has improved from 0.76 in FY06 to 1.16 3QFY07 mainly because of improved control on costs resulting in improved profits. Due to banks eagerness for raising longer term deposits to match their assets maturity profiles, it is expected that the share of fixed deposits in total deposits of the banking system would continue to further increase in days ahead.
Whereas the ROA of the banking system has further improved to 2.1 percent, Bank Alfalah's ROA has shown a significant decline in the FY06. Though still better than the industry average the ROA declined from 0.74 in FY04 to 0.64 in FY06. The total assets of the bank have grown by 11% from Rs 248.31 billion to Rs 275.69 billion in 2006. The bank's earning assets have shown a significant increase but the high costs of funding these EA have resulted in low profits. In FY06 EA grew by 8.8% but the resulting profitability growth has only been 3.6%.
ROE has had a fluctuating trend for the bank. It rose in the FY05 on the back of high profits for the year but declined in the subsequent year. As the general trend in the banking sector, this bank is also retaining profits and has had fresh capital inflow. One reason for this enhanced capital base is for meeting the minimum capital requirement of the SBP. The ROE of Alfalah is 17.89%, which is low compared to the sector average of 25.6%. This way the bank also meets the Basel II requirements for risk exposures by keeping higher capital in hand.
Yield is an indicative of the profitability of the banks assets. The bank's net interest income (NII) has increased by 18.2% in 2006 whereas the non-interest income rose by 42.1%. But in the banking sector, the NII contributes the most to the income. The increase in NII is mainly because of the high spreads that Bank Alfalah is taking advantage of like others in the sector.
An important observation in the income of the bank is that its earning assets have been generating increasing returns, over the years. But overall profitability has not seen great increments because of increasing costs of funding these earning assets. In the year 2006 bank's mark-up/interest costs rose by 111% as compared to a 73% increase in its earnings. This is also indicated by a declining interest margin, which is a ratio of mark-up/return/interest expensed to the mark-up/return/interest income. The result is that though the yields are high, overall profits are low and so ROA, ROE and ROD have shown a declining trend in 2006. However the situation improved in 3Q'07 as shown by trend below.
The non-performing loans (NPLs) have shown variable character during the period of analysis, first increasing from Rs 2.845 billion in CY03 to Rs 2.935 billion in CY04, then decreasing by almost two thirds of that to Rs 1.06 billion in CY05. Thus there was a drastic cut down in NPLs in this year, which was also reflected in industry figures, where NPLs decreased from Rs 211 billion in CY03 to Rs 177 billion in CY05. This was the result of extensive measures by the industry in general and this bank in particular to improve the regulation and monitoring of loans and control defaults through more rigorous screening.
The following year, however, once again showed a rapid rise of more than a hundred percent in NPLs to Rs 2.31 billion. This rise in NPLs can be more accurately attributed to the rapid rise in interest rates during this period than to any lapse in the bank's screening procedures, as the State Bank had taken definite measures to tighten its monetary policy. At the same time there was a high level of indebtedness in both private sector and consumer markets.
There was a slowdown in the rapid decline in industry NPLs, which stood at Rs 175 billion at the end of CY06. Disaggregated industry analysis revealed that there were plenty of fresh NPLs incurred during this period. However, extensive write-offs and recoveries managed to reduce the overall level of NPLs.
The comparison between figures for FY07Q3 and FY06Q3 reveal that there has been a continuing increase in NPLs into the current year, such that NPLs are now a higher percentage of assets, while the provision coverage for NPLs has declined significantly. The bank is now making greater efforts aimed at the recovery of NPLs, and a tightening of the loan policies is expected.
The debt management figures show that the assets of the bank have become more leveraged during this period. This was due to the fact that while equity has increased, debts have increased by a greater percentage. Equity increased by 10.58% in CY04, 41.86% in CY05, and 64.01% in CY06. However, liabilities rose by an astounding 59% in CY04 and a further stunning 61% in CY05, and then a relatively modest 9.5% in CY06. The steep increases in debt in CY05 and CY06 were due to a spectacular rise in deposits in both years.
Deposits rose from a modest Rs 76.7 billion in 2003 by almost 70% to reach Rs 130 billion in 2004, after which they again rose by more than 70% to touch Rs 222 billion in 2005. Deposits continued to show strong growth, rising by more than 7% in 2006 to cross Rs 240 billion. The major upward trend in deposits throughout the industry has been the result of the heavy economic activity during recent years fuelling the demand of consumers and the private sector for credit. The industry has also shown a trend towards increasing deposits in banks, a major cause of which is, of course, the booming economic activity, apart from higher foreign inflows in the form of worker remittances and FDI, as well as expanding branch networks, product innovation and better efforts at marketing.
In fact, deposit growth in the top five banks, including Alfalah, was actually slower than that in the next five banks. However, local private banks have shown the highest deposit growth of any in the banking sector. Deposits showed consistent growth in both local and foreign currencies. Both customer and institutional deposits showed steep growth in 2004 and 2005, while in 2006, growth in customer deposits slowed while institutional deposits showed a decline. Deposit growth had also slowed in the industry as a whole in 2006, declining from 18.3% in CY05 to 13.1% in CY06.
Another marked trend within the deposit structure of the bank was the greater growth shown by fixed deposits as compared to and at the cost of saving deposits. Fixed deposits increased by an absolutely stunning 100% and 300% in CY04 and CY05 respectively, and by a further 11% in CY06, thus attaining a level of almost Rs 89 billion at the end of that year, as compared to a mere Rs 11 billion at the end of CY03. On the other hand, while savings deposits grew by almost 55% in CY04, their growth slowed to around 25% in CY05, and actually turned into a 3% decline in CY06, so that their level changed from Rs 44 billion at the end of CY03 to Rs 79 billion at the end of CY06. This is a good sign for the bank since its long-term deposits have risen.
The ratio of earning assets to total assets for the bank shows remarkable uniformity, suggesting careful management of and investment in interest generating assets. Within earning assets, however, the bank shows a gradual trend of movement of capital into and away from lendings to other financial institutions. These declined from 9% of earning assets in CY03 to 0% in CY04, then increased to 13.3% in CY05, but were again reduced to 6% in CY06.
This variation also caused a fluctuation in the percentage of earning assets held as advances, which increased from 58% in CY03 to 71.5% in CY04, then again declined to 58.5% in CY05, finally increasing to 68.5% in CY06. The trend in investments has been mainly a declining one, from 39% of earning assets in CY03 to about 28% in CY04 and CY05, then again declining to 26% in CY06. Industry figures substantiate this trend to an extent, where in CY06 advances increased to 55.8% of total assets from 54.4% in CY05, while investment portfolio decreased from 21.9% of assets to 19.2% in the same period. In addition, 60% of the growth in banking assets in CY06 was accounted for by growth in advances.
The advance to deposit ratio (ADR) on the other hand has shown a decline over this period. The ADR for the industry as a whole had actually increased in 2006, as a result of an aggressive loans policy overtaking the strong growth in deposits. The bank, however, managed to maintain and actually improve its liquidity position. As has been mentioned above, deposits showed a steep upward trend, increasing by almost 70% in CY04 and CY05, and by a further 7% in CY06. On the other hand, though advances increased by almost 80% in CY04, they showed more moderate growth rates of 34% and 26% in CY05 and CY06 respectively, showing a more moderate and cautious expansion in loans by the bank. Advances have shown a strong upward trend over both the short and long-term categories.
The figures for 3Q07 show that the bank has further improved its liquidity position through the reduction of the ADR. Advances have grown by 26.8% from Rs 112m to Rs 142m during this period. The high growth in advances was offset by an even higher growth in deposits. The industry as a whole has experienced an ease in the liquidity position as a result of slower growth in loans. This slowdown in lending was caused by an increase in interest rates accompanied by less credit capacity in the market. Industry figures also show that banks have shown an increase in investment portfolios somewhat corresponding to the decline in loans, showing a shift in banks' policy towards lower risks and returns.
The solvency situation for the industry as a whole showed a marked improvement in recent years caused by increasing profitability and fresh inflows of capital. The figures for the bank show that there was a decline in the solvency position in 2005 as a result of high growth in deposits. As a result, from financing 4% of assets in CY04, equity financed around 3% of equity in CY05.
This situation, however, has improved in 2006 because of increases in equity, which once again financed almost 4% of assets. However, earning assets in comparison to deposits declined from around 1.03 in CY04 to 0.97 in CY05 and 0.96 in CY06. This is caused by the fact that while deposits have shown tremendous growth over the period under study, the bank has maintained a consistent approach with respect to its earning assets and has not expanded them to the same extent. The increase in MCR by the SBP has also led to banks increasing their capital share.
The 3Q figures for 2007 show a continuing improvement in the solvency position of the bank as a result of further increases in capital. This follows an industry-wide trend of better solvency. Banks have dominated the capital markets of Pakistan because of their superlative performance. They comprise one third of the total capitalisation of the KSE.
Earnings of Alfalah have been rising on the back of higher profitability over the years. As mentioned earlier banks have been retaining their profits. But the overall boom in the economy and the banking sector has made the investors confident of long-term gains. Thus price has been increasing for Alfalah. The share price fluctuated between Rs 34 to Rs 87 over the past three and a half years P/E has been on the rise that indicates that investors are looking forward to invest in the stocks of the bank in expectation of better returns in the future. A multiple of 13.7x makes the share look overvalued but its strong fundamentals and in particular the success of its subsidiary Warid telecom has kept the investors interested.
MV to BV has shown a steady trend. Though the book value has been on the rise MV is almost 2.5x the BV again indicating investor's confidence generally in the banking sector to do well on the back of high spreads.
Dividend yield has been low. The share is being traded at a high value. But the dividend policy of the bank is such that it prefers bonuses rather than cash dividends. Thus there has been retention of profits by the bank as prefers to reinvest profits rather then giving them out as dividends. The bank plans to use the additional capital to strengthen itself in Pakistan and abroad. Also it intends to use this capital to meet SBP's future capital adequacy requirements. The future plans have kept the investors interested and has resulted in keeping the MV of its share above Rs 50 since February 2007. Dividend cover is given by DPS/EPS. It has had an increasing trend since EPS has been declining more than the DPS. The bank has been inclined towards bonus issues resulting in increased number of outstanding shares. With the profits not rising considerably EPS has been on the decline.
FUTURE PROSPECTS:
The future seems bright for the banking sector in Pakistan. The boom in the economy has particularly favoured the services sector, and of course banking is a vital part of the economic growth of any country. Thus the current growth momentum is likely to sustain into the near future at the least.
SBP further tightened the monetary policy in its recent MPS (2HFY08) by raising the discount rate by 50bps to 10.5%. Increase in CRR by 100 bps strives to reduce liquidity in the market. BAFL shall not be highly affected by this measure, as it has increased its share of term deposits. Rather it shall benefit from the zero rating of CRR on the >1 year deposits by having more to lend as is evident from its high earning asset ratio.
The recent drive by the regulator to reduce the banking sector spreads shall result in a decline in the profitability of the sector. The banking sector spreads have declined, but only marginally. The stricter provisioning requirements and withdrawal of FSV implemented by the SBP will 1) reduce the profits and 2) make the banks cautious in their lending, as is evidenced by the deceleration of credit as mentioned above. If the government continues to finance its deficit though the commercial banking sector, it will crowd out the private sector. Endeavors taken in this direction by the SBP may yield results if complemented by policies elsewhere.
After current tightening, average deposit rates are also expected to increase which might impact BAFL's high margins. Future expansion through low cost funding sources might help in near future.
Recently, SBP has raised the upper limit of retail exposure to Rs 75 million in case of consumer loans and small business loans. Moreover, the exposure limit should not be more than 2% of total (gross) retail portfolio of the bank. Penetration in Small & Medium Enterprises (SMEs) segment and expansion in the Middle East markets are some of the opportunities that BAFL can tap.
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Bank AlFalah Financials
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2003 2004 2005 2006 Q3 '07
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Balance Sheet
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Assets
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Cash and balances with treasury banks 14065958.5 22253294 26328715 25404127
Balances with other banks 1905437 6448663 11222660.5 25718628
Lendings to financial institutions 3718866.5 13525246.5 19753573 5340201
Investments 32203396 46459725.5 56959232.5 89778769
Advances 88931400 118864010 149999325 149336509
Other assets 2390033.5 3539244 4742290 5993399
Operating fixed assets 3536065 5450285.5 8561528.5 10888391
Deferred tax asset 0 0 0 0
Total Assets 146751156.5 216540468.5 277567324.5 312460024
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Liabilities
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Bills payable 1721171 2983397.5 3412129.5 3959218
Borrowings from financial institutions 12925792 9284109.5 7119259.5 16096061
Deposits and other accounts 1.03E+08 1.76E+08 2.31E+08 2.60E+08
Sub-ordinated loans 1274610 2561417.5 3223355 3221482
Liabilities against assets subject 0 0 0 0
to financial lease
Other liabilities 2456049 3972505 6262581 11597273
Deferred tax liabilities 299422 379950 1202702 1995264
Total Liabilities 121883650.5 195211358.5 252147256 297097746
Net assets 24867506 21329110 25420068.5 15362278
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Represented by
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Share capital 2250000 2750000 4000000 65000000
Reserves 899573 1679995 2550375.5 2349913
Unappropriated profit 911671 1123572.5 2104958.5 4746655
4061244 5553567.5 8655334 13596568
Surplus on revaluation of assets 948622 809237.5 1197701.5 1765710
- net of deferred tax
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Equity 5009866 6362805 9853035.5 15362278
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Weighted average number of ordinary shares 250000 280428 296016 456132 649337
Average share price 45.90277778 48.7431 53.22344398 51.73094406
Profit and loss account 2003 2004 2005 2006 Q3 '07
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Mark-up/return/interest earned 4033380 5620203 12246811 21191470 18841411
Mark-up/return/interest expensed 2028577 2434459 7204992 15232886 12319267
Net mark-up/interest income 2004803 3185744 5041819 5958584 6522144
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Provision against non-performing -87091 -370208 -402298 -697690 -922388
loans and advances - net
Provision for diminution in value of investments 0 -2165 0 0 0
Bad debts written off directly -418 -351 -512 -1537 -3290
-87509 -372724 -402810 -699227 -925678
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Net mark-up/interest income after provisions 1917294 2813020 4639009 5259357 5596466
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Non Mark-up/Interest Income
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Fee, commission and brokerage income 399383 675868 1158747 1804998 1804390
Dividend Income 112017 52539 52014 37393 39992
Income from dealing in foreign currencies 106848 218820 290091 386997 343362
Gain on sale of securities 239551 180751 1985697
Unrealized gain/loss on revaluation 23163 -27599 -5317
of investments classified as held for trading
Other income 2773503 572822 504967 842099 776452
Total non-mark up/interest income 3391751 1520049 2268533 3224639 4944576
5309045 4333069 6907542 8483996 10541042
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Non mark-up/interest expenses
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Administrative expenses 1799490 2677635 4313023 5874745 6149702
Other provisions/writeoffs 2000 0 10125 0 0
Other charges 1875 1700 21104 43306 1564
Total non-mark up/interest expenses 1803365 2679335 4344252 5918051 6151266
3505680 1653734 2563290 2565945 4389776
Extraordinary/unusual items 0 0 0 0 0
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Profit before taxation 3505680 1653734 2563290 2565945 4389776
Taxation
For the period : Current 1364723 586159 592635 476226 1320839
Deferred -13671 -3663 267524 427902
For prior year : Current 22887 -30000 -7000 -100874
Deferred 8507 9249 8037 62507
Net Taxation 1382446 561745 861196 803254 1383346
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Profit after taxation 2123234 1,091,989 1,702,094 1,762,691 3,006,430
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Unappropriated profir brought 250050 463042 860300 1886845
forward as previously reported
Effect of change in accounting 250000 500000 0 0
policy with respect to dividend
declared after the balance sheet date
Unappropriated profir brought forward as restated 500050 963042 860300 1886845
Transfer from general reserve 0 0 0 0
Transfer from surplus on revaluation 14405 23667 24870 26074
of fixed assets - Curret year net of tax
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Profits available for appropriation 2637687 2078698 2587264 3675610
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Appropriations
Transfer to statutory reserve -424647 -218398 -340419
Bonus shares -1000000 -500000 500000
Dividend 250000 500000 360000
-1674647 -1218398 -1200419
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Unappropriated profir carried forward 963042 860300 1386845
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Basic and diluted earnings per share 8.49 4.37 3.92 3.86 4.63
Dividend for the year 500000 0 360000 0 0
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Ratios 2003 2004 2005 2006 Q3 '07
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Earnings Ratios
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ROA 0.74 0.79 0.64 0.96
ROE 21.80 26.75 17.89 19.57
ROD 1.06 0.97 0.76 1.16
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Asset Quality Ratios
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-6.39E-01 117.92% 74.24%
NPL 2.94E+06 1.06E+06 2.31E+06 4.03E+06
NPL to Advances 3.3% 0.9% 1.5% 2.7%
Provisions 1360057 1552981 2236456 3151396
Provisions to NPL 0.46 1.47 0.97 0.78
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Market Value Ratios
Price to earning 10.50 12.43 13.79 11.17
Market value to book value 2.57 2.27 2.46 2.19
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Debt Management
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Debt to equity 4.90 9.15 9.92 19.34
Debt to assets 0.83 0.90 0.91 0.95
Deposit times capital 4.15 8.25 9.08 16.94
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Liquidity
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Earning assets to assets 0.85 0.83 0.82 0.78
Advance to deposit 0.86 0.68 0.65 0.57
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Yield on earning assets 4.43% 6.61% 8.91% 6.97%
Cost of funding earning assets 1.92% 3.89% 6.40% 4.56%
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Solvency
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Equity to assets 16.95% 9.85% 9.16% 4.92%
Equity to deposits 24.09% 12.12% 11.01% 5.90%
Earning assets to deposits 1.23 1.05 1.03 1.04
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Dividend Payout
Dividend yield 3.88% 2.50% 0.00% 0.00%
Dividend cover 8.49 2.45 3.22 0.00 0.00
Dividend per share 1.00 1.78 1.22 0.00 0.00
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Other Ratios (To be included)
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Cost of funds 2.10% 3.89% 6.40% 4.46%
Intermediation cost 2.31% 2.33% 2.47% 2.23%
Net profit margin 0.94% 0.92% 0.74% 1.09%
Interest margin 0.57 0.41 0.28 0.35
Net interest margin 1.93 1.97 2.32 1.49
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